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Thursday, December 23, 2010

It’s Not Rocket Science

Tom Bradley at Steadyhand has an excellent book out called It’s Not Rocket Science (available free here). It is a collection of 34 of Bradley’s articles over the past five years. Each article approaches an investing topic in an easy-to-understand style contrasting sharply with the common industry message that investing is hard and that people should be afraid.

Compared to the rest of the mutual fund industry, Steadyhand takes a very different approach to active investing and this shows through in Bradley’s writing. There are too many good themes is the book to mention them all, but I’ll pick three.

S>B>C

Over the long term “stocks will beat bonds, and bonds will beat cash.” This may not be true for one year or even five years, but my investing approach is based on the expectation that S>B>C.

Insured Investment Products

We’d all prefer not to lose money, but “too often buyers believe that someone else is paying for the insurance guarantees. Wrong. There is no new source of return being invented.” The cost of insurance guarantees comes out of your returns.

Alpha

“Security selection is the highest quality alpha you can get.” I’ve personally given up on seeking alpha (which means trying to beat market indexes), but I believe that some stock pickers are capable of choosing outperforming stocks consistently enough to expect to beat the index over the long term. Other approaches like market timing or trying to guess future interest rates seem like a loser’s game.

Whether you are an index investor or an active investor, the lessons in Bradley’s articles are worth learning.

@Mark: I guess it comes down to what the length of an "era" is. Over a long enough period of time, it makes no sense for lenders to be able to earn more than builders. If builders can't make money, then they will stop borrowing from lenders. If builders don't make good enough returns then they won't have the money to pay back lenders. This relationship between lender returns (B) and builder returns (S) means that they are not just uncorrelated random variables.

We can have S<B for a decade, but it seems very unlikely to persist for a generation. As for S<<B, this seems unlikely for even a decade.